Obsidian hostile takeover bid for Bonterra shows ‘frustration,’ analysts say

Obsidian hostile takeover bid for Bonterra shows ‘frustration,’ analysts say

Obsidian hostile takeover bid for Bonterra shows ‘frustration,’ analysts say

CALGARY — A hostile takeover offer by Obsidian Energy Ltd. launched by making public a letter to the CEO of Bonterra Energy Corp. demonstrates growing frustration at the slow pace of consolidation in the sector, energy industry analysts say.

On Monday, Obsidian interim CEO Stephen Loukas released the letter addressed to Bonterra chairman and CEO George Fink in which an offer is made to combine the two small Calgary-based oil and gas producers.

Under the proposed deal, two Obsidian shares would be issued for each Bonterra share — although Bonterra was trading at nearly a three-to-one valuation at market close on Friday.

“I don’t know that this goes anywhere only to say that, hey, finally people are getting more aggressive with their consolidation ideas in the space,” said Cody Kwong, managing director, institutional research, for Stifel FirstEnergy in Calgary.

“I think that’s what our space needs is consolidation, and I think there’s kind of frustration that maybe some deals haven’t been consummated.”

Analyst Patrick O’Rourke of ATB Capital Markets agreed that consolidation is needed to create larger entities that would be more liquid and resilient and therefore more attractive to investors who have been steering clear of the energy sector.

In trading on Monday in Toronto, Obsidian closed five cents or 9.4 per cent higher at 58 cents a share, while Bonterra gained a penny to $1.51, 2.6 times as expensive.

Fink did not immediately respond to a request for comment.

In his letter, Loukas concedes the offer, which would leave Bonterra shareholders with 48 per cent of the merged company, doesn’t match up with current market valuations.

“While this is currently below a trading price-based exchange ratio, our detailed contribution analysis supports that this is a competitive and highly compelling exchange ratio,” he says.

“Bonterra currently trades at a premium to Obsidian Energy and other relevant public oil-producing companies, despite recent performance that has been weaker than Obsidian Energy as measured by cash flow, operating costs and well results.”

He says the companies have been talking about a merger since early 2019 but failed to make “meaningful progress” because of Bonterra’s insistence on “standstill” provisions that would limit flexibility.

The merger would result in $50 million in the first year and $100 million over the first three years in administrative, operating and capital cost savings plus additional cash flow, he said.

Neither company is financially strong and there is some doubt the merger would create the claimed synergies, said Kwong.

“Both entities are financially constrained and are having a hard time showing a pathway to true free cash flow generation right now, which is what the market really wants to see,” he said.

In a report, analyst Christopher Jones of Haywood Securities pointed out a merged company would be heavily endebted, inheriting both Obsidian’s net debt of about $518 million and Bonterra’s $300 million, as of June 30.

Obsidian, formerly known as Penn West Petroleum Ltd., recently announced second-quarter production of 25,900 barrels of oil equivalent per day, while Bonterra produced 10,180 boe/d.

In September 2019, Obsidian launched a formal process to explore strategic alternatives, including the possible sale of the company, to maximize shareholder value.

Two weeks ago, Bonterra announced it had secured financing from the Business Development Bank of Canada in co-operation with its existing syndicate of lenders that would allow it to restart its suspended capital program this year and allow it to bring production back to last year’s levels.

This report by The Canadian Press was first published Aug. 31, 2020.

Companies in this story: (TSX:BNE, TSX:OBE)

Dan Healing, The Canadian Press

Business

Get local stories you won't find anywhere else right to your inbox.
Sign up here

Just Posted

Blank Unemployment Benefits form
Red Deer unemployment rate rises to 10.6 per cent

Red Deer’s unemployment rate rose slightly during the month of April. The… Continue reading

Red Deer teacher Jeremey Spink has been nominated as the NHL/NHLPA Most Valuable Teacher. He is one of 20 teachers in the running across North America for the award in February. (Photo by BYRON HACKETT/Advocate Staff)
Last day to vote for Red Deer Teacher as NHL Most Valuable Teacher

Eastview Middle School teacher Jeremy Spink is one of three teachers in the running for the award

Starting Monday, golf courses across the province will be limited to their household or for those who live alone, their two close contacts. (Photo by BYRON HACKETT/Advocate Staff)
Golf in Alberta limited to household or close contacts starting Monday

Golf courses will have new COVID-19 protocols to follow next week. Starting… Continue reading

Lacombe-Ponoka MLA Ron Orr
MLA Ron Orr pleads with Central Albertans to follow COVID-19 rules

Lacombe-Ponoka MLA Ron Orr is changing his tune on COVID-19. Orr originally… Continue reading

People line up at a COVID-19 vaccination centre, Friday, April 23, 2021 in Deux-Montagnes, Que. Canada's two biggest provinces are continuing to ramp up COVID-19 vaccinations as they report lower hospitalization figures.THE CANADIAN PRESS/Ryan Remiorz
COVID-19 rapid tests going to more businesses, Alberta truckers get shots in Montana

Ottawa has introduced new ways for small and medium businesses to get… Continue reading

Alberta Health Services locked the Whistle Stop Cafe in Mirror on Wednesday morning after owner Christopher Scott refused to comply with health orders. (Photo by Paul Cowley/Advocate staff)
UPDATED: AHS shuts down Whistle Stop Cafe for defying health orders

Justice minister promises to get tough with those ignoring public health orders

Prime Minister Justin Trudeau walks to a news conference in Ottawa on Tuesday May 4, 2021. A broad coalition of MPs from all five parties wants the federal government to support waiving the global rules that guard vaccine trade secrets. THE CANADIAN PRESS/Adrian Wyld
As MPs urge support, Trudeau demurs on whether government backs COVID-19 waiver

WASHINGTON — Justin Trudeau stopped well short Friday of endorsing efforts to… Continue reading

Workers perform ground preparations outside City Hall in Yellowknife on Monday, July 4, 2011. A recent outbreak of COVID-19 cases in Yellowknife is mostly affecting children and youth, the territory’s chief public health officer says. THE CANADIAN PRESS/Jonathan Hayward
Most of Yellowknife’s COVID-19 cases are in children and youth: public health officer

YELLOWKNIFE — A health official in the Northwest Territories says a recent… Continue reading

Statistics Canada building and signs are pictured in Ottawa on Wednesday, July 3, 2019. THE CANADIAN PRESS/Sean Kilpatrick
A year after jobs data leak, StatCan resumes sharing advance numbers with officials

OTTAWA — Statistics Canada has resumed its practice of giving key federal… Continue reading

jobs - T - 3-6-2020
Job search: 10 ways to make your LinkedIn profile stand out in 2021

In 2021 successful job hunting requires having a LinkedIn profile that’s current… Continue reading

Max Parrot of Canada competes in the men’s snowboard big air final at the 2018 Winter Olympic Games in Pyeongchang, South Korea, Saturday, Feb. 24, 2018. Parrot has won the Comeback of the Year honour at the Laureus World Sports Awards. THE CANADIAN PRESS/Jonathan Hayward
Canadian snowboarder Max Parrot wins Laureus World Sports Award for comeback

Parrot beat out former Washington Football Team quarterback Alex Smith

This Nov. 22, 2015 file photo shows Justin Bieber at the American Music Awards in Los Angeles. Bieber’s world tour is facing another setback as the COVID-19 pandemic rages on. The Stratford, Ont.-raised pop singer is pushing dozens of tour dates including stops in three Canadian cities.	THE CANADIAN PRESS/AP-Photo by Jordan Strauss/Invision/AP, File
Justin Bieber postpones Canadian summer tour dates until 2022

52-date world tour will now kick off Feb. 18, 2022

Most Read